Active fund managers – those who pick and choose investments in an effort to beat their underlying market – have come in for growing levels of abuse in recent years.
Many are nothing more than “closet” trackers, charging high fees for merely hugging the index. But more importantly, the majority don’t do their job – they simply don’t beat the market.
Another report has just come out. Does it do anything to change that view?
Most fund managers are bad at their jobs, it seems
“Almost every actively-managed equity fund in Europe investing in global, emerging and US markets has failed to beat its benchmark over the past decade,” according to a quite staggering new study by S&P Dow Jones Indices, cited by Madison Marriage in the Financial Times.
S&P looked at the performance of 25,000 funds. Crucially, the performance figures are after fees are taken into account – in other words, it’s the return you’d get in your portfolio.
Over five years, 80% of European active funds failed to beat their benchmark. Over ten years, that rose to 86%.
As if that wasn’t woeful enough, within that data, there are some gobsmackingly bad figures. Apparently, 98.9% of US-focused equity funds underperformed, as did 97.8% of global equity funds.
Oh, but what about emerging markets? We’re always told that you really need an active manager over there.
Developed markets are incredibly well-researched – there’s so much information out there that it’s almost impossible to beat them because they’re so incredibly efficient (well, except in 2008 and 2000 and every other past crash of any significance, but put that aside for now). So it’s no wonder the poor active manager struggles to win there.
However, emerging markets – we’re told – are so inefficient that there are piles of under-researched opportunities, lying submerged from view like so many pearl-laden oysters, just waiting for the right super-investor to shuck them. That’s why you need to get active when you venture into emerging territory.
Logical, right? So go on, indulge me. Before you read the actual figure, why not take a mental punt on the percentage of active managers that outperformed the market over the last decade? I mean, given the inefficiencies and all that, they presumably did better than average, so maybe – what – 25% managed to beat the benchmark over a decade?
The number you’re looking for is 3%.
That’s right. A full 97% of emerging market funds utterly failed to uncover those hidden gems and instead floundered along behind the index.
97%. That’s a number to remember the next time you’re reading one of the weekend finance supplements and some salesman spins a line about “exploiting inefficiencies”. Something’s being exploited, all right – but it isn’t emerging market inefficiency.
It’s just yet more evidence that most managers underperform
It’s all pretty damning. And I’m sure that these statistics can have holes picked in them. You can complain about the indices used. Or you can complain about the methodology. And if you look at the comments under the original article in the FT, you’ll see that plenty of people have.
But the core proposition is not in doubt. Over the long run, as David Blake of London’s Cass Business School puts it, “the average equity fund manager is unable to deliver outperformance from stock selection or market timing”.
In other words, your average professional is rubbish at picking stocks, and at choosing when to buy or sell. Given that those are the only two ways available to outperform, you have to wonder what the point of them is. And that’s pretty much what Blake says: “A typical investor would be almost 1.44% better off per annum by switching to a UK equity tracker.”
In a way this shouldn’t be a surprise. There are good reasons for active fund managers to underperform. The psychological tics afflicting fund managers are in many ways more challenging than the ones affecting private individuals.
Like it or not, they largely feel compelled by incentive structures and career risk (the danger of getting fired, basically) to focus on the short term. You have to make a name for yourself – be a Neil Woodford, or a Nick Train – before you can take big, bold bets and stick to a long-term strategy, without everyone pulling their money away in a panic. (And even then there are plenty of people who’ll moan at the first sight of even a “star” manager not quite delivering over the last six months or whatever.)
So should you stick all your money into a UK equity tracker? No. What you really need to understand is that there is no such thing as “passive” investing. I’ve said this before, but every asset allocation decision you make is “active”.
The real difference is in the price you pay to invest in an asset. Sometimes it’s worth paying an active manager – no really, believe it or not, I do think some active managers are actually worth paying (a little) for.
The ones in the MoneyWeek investment trust portfolio, for example, have done very well and they’ve got long records of doing so.
But if you’re going to invest with a manager who charges you more than a tracker, then you need to be sure that the extra cost is justified in terms of performance, or access to an asset class you wouldn’t otherwise be able to get hold of. If not, then you’re better off finding a way to get cheap, passive exposure to the asset class or strategy that you’re after.